National Oilwell Varco 2000 Annual Report Download - page 28

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3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of National Oilwell and its
subsidiaries, all of which are wholly owned. All significant intercompany transactions and
balances have been eliminated in consolidation.
Fair Value of Financial Instruments
Financial instruments consist primarily of cash and cash equivalents, receivables, payables and
debt instruments. Cash equivalents include only those investments having a maturity of three
months or less at the time of purchase. The carrying values of these financial instruments
approximate their respective fair values.
Inventories
Inventories consist of oilfield products, manufactured equipment, manufactured specialized
drilling products and downhole motors and spare parts for manufactured equipment and drilling
products. Inventories are stated at the lower of cost or market using the first-in, first-out or
average cost methods.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major improvements that
extend the lives of property and equipment are capitalized while minor replacements,
maintenance and repairs are charged to operations as incurred. Disposals are removed at cost less
accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is
provided using the straight-line method or declining balance method over the estimated useful
lives of individual items.
Intangible Assets
Deferred financing costs are amortized on a straight-line basis over the life of the related debt
security and accumulated amortization was $873,000 and $539,000 at December 31, 2000 and
1999, respectively. Goodwill is amortized on a straight-line basis over its estimated life of 10-40
years. Accumulated amortization at December 31, 2000 and 1999 was $19,559,000 and
$9,234,000. On an annual basis, the Company estimates the future estimated discounted cash
flows of the business to which goodwill related in order to determine that the carrying value of
the goodwill had not been impaired.
Foreign Currency
The functional currency for National Oilwell’s Canadian, United Kingdom, German and
Australian operations is the local currency. The cumulative effects of translating the balance
sheet accounts from the functional currency into the U.S. dollar at current exchange rates are
included in accumulated other comprehensive income. The U.S. dollar is used as the functional
currency for the Singapore and Venezuelan operations. Accordingly, certain assets are translated
at historical exchange rates and all translation adjustments are included in income. For all
operations, gains or losses from remeasuring foreign currency transactions into the functional
currency are included in income.